Debt consolidation and your credit score

A: Applying for a debt consolidation loan and using it to pay off your other accounts shouldn’t raise or lower your credit score significantly in the short term. While it does mean you’ve taken on new debt, credit agencies look at your credit history as a whole and will note that your other accounts have been paid off. In the long term, if you make the payments on the new loan consistently for a year or two, it should ultimately improve your credit score.

It pays to be careful how you deal with the accounts you pay off, however. If you have a poor credit record, you may decide to close your credit card accounts in order to remove the temptation to spend. But closing your accounts doesn’t remove the credit history connected with them. In addition, closing several accounts can reduce your total available credit and thus raise the percentage of your available credit that you’re using. This could make you look “maxed out”, and a credit agency could consider this as a warning sign.

If you do close your accounts, close newer ones rather than ones you’ve had for a long time. Having long-standing accounts establishes a long credit history, which helps your score. And make it clear through a letter to your creditor that the account is being closed on your request and should be reported to the credit agency as such.

You can adversely affect your credit rating if you turn to a debt management agency to negotiate a settlement with your creditors for less than you owe. This appears on your record as a failure to repay what you’ve promised. Some agencies may also allow your accounts to go unpaid for months before they settle, which also hurts your score.